Q2 | Torys QuarterlySpring 2022

Observations from the legal wild west of the metaverse

Ever since Facebook (now Meta) revealed its billions-of-dollars metaverse bet in late 2021, the metaverse has seen its public profile skyrocket. The question on everyone’s minds is: does the tech community’s latest buzzword have staying power?

 
The numbers point to a speculative yes. According to Goldman Sachs, the metaverse market opportunity could reach $8 trillion1. For deal activity, look no further than Microsoft’s $68.7 billion proposal to acquire Activision Blizzard (rationalized as a move toward the metaverse), the maker of video games, including Call of Duty, Candy Crush and Overwatch2. The investment community is also taking note: at last count, Canada is home to two different metaverse-themed exchange traded funds3 not to mention that metaverse real estate sales topped $500 million in 20214.

With the metaverse making its way into mainstream consciousness, legal implications should be considered. Yet to date, the metaverse remains something of a legal wild west, with many overarching legal concepts not mapping neatly to its contours. The legal challenges and opportunities in the metaverse for companies will be best addressed through strategies that embrace a variety of existing legal principles yet are responsive to the realities of a radically new environment. This paper is just a brief outline of key themes to be considered as organizations examine the role the metaverse will play in their futures: technology, privacy and IP.

Technology foundations of the metaverse

The metaverse is too new to define accurately, but one can think of it as a reimagined internet: a collection of immersive, shared digital worlds. One vision for the metaverse is a digital life that parallels reality, where people can live, work, buy, sell and socialize, representing themselves as avatars by using virtual and augmented reality. Other metaverse characteristics? It is limitless (no limits on number of users, types of experiences etc.), persistent (it can’t be reset and exists whether a user is online or not) and decentralized (think blockchain—run and owned by users versus any single entity); all important factors to remember when considering legal issues in the metaverse. And while we already see several metaverse platforms (each vying to be “The” metaverse) supporting video games, concerts, and in-world purchases5, the “what” of the metaverse is really anything anyone can dream up.

However, the “how” is beginning to crystallize, and one important technology component on which the metaverse looks like it will depend on is blockchain, which is the basis for crypto currencies and NFTs. The metaverse economy operates on cryptocurrencies, and in the same way that cryptocurrencies are revolutionizing value and finance, NFTs may well be revolutionizing, well, everything else6.

The World Economic Forum’s Global Consortium for Digital Currency Governance, created in 2020, and including the Bank of Canada, is exploring a Central Bank Digital Currency—and as part of this initiative, it is working alongside the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, the Swiss National Bank and the Bank for International Settlements to consider the key features needed for a workable CBDC system. The idea is that these digital reserve currencies could solve for the volatility of crypto yet provide many of its benefits.

NFTs, cryptocurrency’s fungible cousin, also exist by virtue of blockchain, and the value of NFTs in providing for digital uniqueness and enabling ownership of digital assets is particularly obvious in the context of something like the metaverse—think exclusive digital club access, art to hang in your virtual mansion, or that signature mini dragon that sits on your avatar’s shoulder.

The exact nature of the legal risks blockchain will represent in the metaverse remains hazy. But we can imagine that as blockchain technology is further integrated into our lives, the same legal challenges blockchain has raised to date will exist in respect of the metaverse, namely those stemming from a lack of understanding of the underlying technology, jurisdictional issues, service levels and performance issues, governance issues, etc. And of course with governments and regulators eyeing crypto and NFTs not only as hotspots for money laundering and terrorist financing but also as sources of revenue, we can expect to see regulatory oversight continue to increase.

Data privacy in a data-rich metaverse

Privacy and data protection will face stiff headwinds in the metaverse from at least two directions: an exponential rise in the volume and potential value of data generated in the metaverse, and the slow lag of legal and regulatory frameworks in relation to new technologies, new forms and uses of data and real world harms that can arise out of digital identities.

The risk for users will increase as metaverse actors collect far more—and more detailed—personal data from users, and in real time. This includes highly sensitive biometric information, such as real life facial expressions and heart rate read through VR headsets for instance, and literally every move made by an avatar in the metaverse, from attendance at meetings or social gatherings, to advertisements, locations frequented friends interacted with, and purchases made.

In Canada, the draft 2020 Digital Charter Implementation Act, while not yet enacted, nonetheless provides insight into the current conversation on modernizing federal privacy law. The bill—which is expected to be re-introduced in 2022—proposed new rules on everything from a right to have data de-indexed and algorithmic transparency to de-identifying personal information in the M&A process and enhancing penalties for noncompliance.

Business risk in the metaverse isn’t confined to storing data within a single platform. If all goes as predicted, the metaverse will embrace many platforms—yet all will connect to one central metaverse. Users moving between platforms will take their virtual identities as they travel between environments, leaving data more vulnerable to a breach and making compliance and liability assessments more complex.

Data portability appears set to be one of the driving forces of the metaverse, and was among the issues addressed in the Digital Charter Implementation Act, which proposed both the introduction of a right for an individual to transfer their personal information from one organization to another, as well as the development of a framework to govern data portability.

Intellectual property goes virtual

As more business (and possibly, life) moves to the metaverse, intellectual property questions will become thornier. Companies may wish to consider ways they can get ahead of any still-nascent commercial opportunities by staking specific IP claims in the metaverse. For example, brands from Nike to Walmart are filing trademark applications—and with knockoff virtual assets already in the metaverse mix, Nike has filed a lawsuit against clothing resale startup StockX for making unauthorized use of Nike sneakers as NFTs. We can also expect copyright and other intellectual property to play a part, although the exact nature of that will remain to be seen.

On trademarks specifically, virtual trademarks are the next frontier. The idea of protecting the use of a trademark that exists in a virtual world, supported by a virtual economy and its virtual currency, raises a host of complex issues. Chief among them is what will constitute trademark infringement.

The world of video games may provide some direction on how the law will apply to virtual trademarks. Trademark owners in the gaming space have shifted their attention to both how marks are used in the promotion and sale of games as well as how they are presented within games. With the gaming world serving as a first step into the full-fledged metaverse, we can expect some business and legal parallels to be drawn.

The metaverse as fully imagined will continue to add novel issues. Intellectual property rights holders will want to keep an eye on how this space develops to protect their assets in the virtual world.

Conclusion

This was just a big picture overview of a few of the material issues that the metaverse will undoubtedly bring into focus over time, and does not touch on many other legal issues. However, while the metaverse may in many ways represent a wild west of uncharted territory, some of the fundamental legal concepts that challenged legal systems at the advent of the internet have since taken shape in jurisprudence and regulation, and offer a possible direction for the road ahead. With use cases running the gamut from ecommerce to the workplace, companies who wish to be competitive in the space should start preparing their strategies now while reality-checking the early-adoption and long-term risks.


To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2022 by Torys LLP.

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